In re Moore

1

In re: MICHAEL L. MOORE, TONI R. MOORE, Debtors.

No. 16-33444

United States Bankruptcy Court, S.D. Ohio, Western Division

August 23, 2023

Chapter 7

ORDER CONCERNING THE APPLICABILITY OF IN RE MADAJ 149 F.3D 467 (6TH CIR. 1998) (DOC. 35 & 36)

Guy R Humphrey, Judge.

This contested matter is before the court on the Debtors' Motion For an Order of Contempt as to Curtis Pearman and Curtis Pearman's response to that motion, along with additional briefing filed by the parties. During a telephone conference, the parties requested that the court determine whether the United States Court of Appeals for the Sixth Circuit's decision in In re Madaj, 149 F.3d 467 applies to the circumstances of this case in which the Chapter 7 Trustee (the "Trustee") initially filed a "Notice of Need to File Proof of Claim Due to Recovery of Assets," but subsequently docketed a "Report of No Distribution" with no recovery of or administration of assets for the bankruptcy estate. For the reasons discussed in this Order, the court determines that Madaj applies to the circumstances of this case, but that it is not necessarily dispositive of all of the issues raised by the parties.

In November 2015 Michael L. Moore and Toni R. Moore (the "Moores") entered into a Lease Agreement (the "Lease") with Curtis Pearman ("Pearman") for the lease of commercial space in a building owned by Pearman known as "The Forest Park Building" located in Richmond, Indiana. Doc. 36 (Exhibit B); Doc. 49, ¶¶ 3, 4. The space was to be used by "DermaBella Spa and Skincenter LLC"; an entity created by and owned by the Moores. The Moores hired contractors to customize this space for their new business, and that work was subsequently completed. Id. at ¶¶ 5, 6. However, less than a year later, on October 31, 2016, the Moores informed Pearman that they "could no longer honor their lease obligations." Id. at ¶ 8. The Moores sent an email to Pearman informing him that the business "has ceased . . . operations" and the property was vacated. Id. The Moores also mailed the key to the premises back to Pearman. Id. at ¶ 9.

Then, on November 4, 2016, the Moores filed a petition for relief under Chapter 7 of the Bankruptcy Code. Doc. 1; Joint Stipulations of Fact, Doc. 49, ¶ 10. On the petition, the Moores indicated that they did not anticipate there would be assets which could be liquidated to provide a distribution to unsecured creditors. Doc. 1 at 6, Q. 17. Accordingly, the original Notice of Chapter 7 Bankruptcy Case sent to creditors advised the creditors not to file a proof of claim. Doc. 7, § 10. The case proceeded and it briefly appeared that assets would be available to liquidate for the benefit of the Moores' creditors. See Doc. 16 (Notice of Need to File a Proof of Claim Due to Recovery of Assets). A bar date of April 17, 2017 was set by the Clerk on January 17, 2017. Id.; Doc. 49, ¶ 19. But, three weeks later, on February 7, 2017, the Trustee determined that no non-exempt assets were available to liquidate and filed a Report of No Distribution. Doc. 49, ¶ 24. This occurred more than two months before the bar date for filing proofs of claim in the case. The Moores voluntarily reaffirmed debts with various secured creditors, namely Nationstar Mortgage LLC, Wells Fargo Bank N.A. and U.S. Bank. Docs. 12, 14. They received Chapter 7 discharges on March 1, 2017 (Doc. 20), and the case was closed on May 3, 2017. However, it is undisputed that at no time before their bankruptcy case was closed did the Moores notice the filing of their bankruptcy petition to Pearman or schedule Pearman as a creditor or the holder of an executory contract.

Approximately five years after the closing of the Moores' bankruptcy case, on October 6, 2022, Pearman filed a complaint in the Wayne County, Indiana, Superior Court (the "State Court") against the Moores to collect damages based upon on their breach of the pre-petition Lease. The Moores' new counsel contacted Pearman on January 17, 2023 and "advised him that the debt was discharged." Doc. 49, ¶ 45. Pearman asserts that he first learned of the Moores' bankruptcy at this time, after he filed the State Court complaint. Id. at ¶¶ 28, 38.

Unable to resolve the matter with Pearman, on November 17, 2022, the Moores filed a motion to re-open their bankruptcy case, which the court granted on February 7, 2023. Docs. 25, 28, 30, 31. The Moores then filed their contempt motion against Pearman. Doc. 35. The Moores assert that Pearman's pursuit of the State Court litigation violates the bankruptcy discharge order and, therefore, he is in contempt of it.

Although the Moores concede Pearman was neither noticed of the bankruptcy nor scheduled as a creditor or holder of an executory contract, they argue that any debt arising out of the Lease was nevertheless discharged because their case ultimately had no assets for distribution to creditors. The Moores rely on the decision In re Madaj, 149 F.3d 467 (6th Cir. 1998). Pearman, acting pro se, opposes the motion and argues that Madaj is distinguishable. Docs. 36, 37. Pearman contends that the debt owed on the Lease was never discharged and that he may proceed to exercise his rights in the State Court. This court also construes Pearman's filing as a cross-motion for sanctions, through which he asks this court to "sanction[] the Debtors and their counsel for recklessly accusing this Bankruptcy Court of negligence in the Debtor' Motion at the Indiana Superior Court", "Requiring Debtors to pay [Pearman's] costs, expenses, and fees in responding to the Debtor's motion" and "Revoking this Court's march 1, 2017, Order of Discharge granted to the Debtors." Doc. 37 at 1. The Moores responded to the cross-motion and further seek to strike Pearman's response. Doc. 40.

The court held a status conference on May 31, 2023. After a colloquy with Pearman and counsel for the Moores, and in an attempt to narrow the issues, the court agreed to determine and the parties agreed to brief the issue of whether Madaj applies to the debt arising out of the Lease.

The court finds many of Pearman's arguments about why any debt under the Lease was not discharged under Madaj to be unpersuasive; however, questions of fact and law remain to be resolved before determining if the Moores owe a debt to Pearman and whether Pearman's actions in the State Court are in contempt of the discharge order.

The Madaj holding is based on an interpretation of § 523(a)(3)(A) of the Bankruptcy Code, which states that:

(a) A discharge under 727 . . . of this title does not discharge an individual debtor from any debt- . . .

(3) neither listed nor scheduled under section 521(a)(1) of this title, with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit-

(A) If such debt is not of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim, unless such creditor has notice or actual knowledge of the case in time for such filing[.]

11 U.S.C. § 523(a)(3)(A). The reference "of a kind specified in paragraph (2), (4), or (6)" is to dischargeability sections related to various types of fraud and claims in the nature of intentional torts. Judd v. Wolfe (In re Judd), 78 F.3d 110, 114 (3d Cir. 1996). Madaj held that in a no-asset Chapter 7 case, pre-petition debts not covered by 11 U.S.C. § 523(a)(2), (4), or (6) are included in any discharge, even when the creditor lacks actual knowledge or notice of the bankruptcy filing. See Judd, 78 F.3d at 115-16 (concluding that the reason for an omission of a debt from the schedules is irrelevant to the discharge of the debt); Beezley v. California Land Title Co., 994 F.2d 1433, 1436-37 (9th Cir. 1993) (stating that "scheduling makes no difference to outcome"). This makes sense because there is no deadline for the "timely filing of a proof of claim" in a no-asset case.^[1] In cases involving debts excepted from discharge under § 523(a)(2), (4), and (6), such debts are not discharged unless the creditor has the opportunity to file a non-dischargeability adversary proceeding. 11 U.S.C. § 523(a)(3)(B); Judd, 78 F.3d at 115; Beazley, 994 F.2d at 1441. Pearman, in his response brief, argues, without much specificity and for the first time, that the underlying state law basis for the alleged Lease debt may be grounded in the Moores' alleged fraud. Nevertheless, the issue of whether this debt is governed by 11 U.S.C. § 523(a)(3)(A) or (B) cannot be resolved as a matter of law, at least at this juncture on this record.

Pearman further argues that it is legally relevant that the creditors in this case were sent a notice to file a proof of claim and given a deadline to file a proof of claim (Doc. 16), even though the trustee ultimately failed to recover assets and make a distribution to creditors (February 7, 2017 Docket Entry). The court finds these are factual distinctions without legal significance as the deadline to file a claim to collect against the bankruptcy estate's assets was meaningless since no assets were recovered and no distribution to creditors was made by the Trustee. Despite the Trustee asking the clerk of the court to send out a notice to file proofs of claim, this case remained a no asset case. Pearman was not prejudiced in any way by not having the opportunity to file a proof of claim. Under Pearman's argument, because he did not receive notice of that meaningless opportunity to file a proof of claim, his claim should not be discharged, whereas if a creditor received notice of the right to file a proof of claim and did or did not file a proof of claim, their claim would be discharged - regardless of the fact that they were all unsecured creditors in a no asset case with no opportunity to receive a distribution. "[T]he debts excepted...